How renting became the new homeownership
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None of that is true for most people under 45 now. Lifetime employment has all but disappeared. The 2008 financial crisis has shaken people's faith in housing as a safe investment. You don't want to tie up a large percentage of your net worth in an illiquid asset that doesn't gain much value, especially if you need to be able to pick up your stuff and move across the country at any time. Therefore, renting is the rational choice for us.
The problem is what to do when you're old. If you happen to own a 5-bedroom house, you can rent out a part of it or sell it and move to a smaller house. In either case, you'll have enough income to enjoy a comfy retirement. Owning a home, in that sense, is like having a massive savings account.
Renters can get the same benefit if they save up a lot of money or invest smartly, but that takes more discipline than just making mortgage payments each month. I wonder how many renters are actually aware of this difference, versus just spending their extra disposable income on fancy clothes, booze, and gadgets.
I'd be interested to hear what Americans think of a policy we have in Australia called mandatory superannuation. It essentially forces people to put around 12% of their income into pension funds (they can choose which fund, or possibly even self-manage it in some cases) that they can't touch until they're retired, meaning that people who rent their whole lives and save nothing can still have hundreds of thousands in savings to support them when they retire.
Everyone under 40-ish agrees that we are never going to see that money. We're essentially paying out of pocket for the current retirees and by the time we retire there will be nobody to pay our pension. Or at least there will not be enough somebodies.
Australia's system is slightly different, in that the pension funds are privately owned and the government (currently) has no way to take money out of them or use it for anything else. People here'd be pretty pissed off if the government started dipping into their super.
Why there isn't enough money in the system I don't know. There are likely to be multiple factors ranging from the fact that the country is just 25 years old, that there's been population decline or stagnation, or that those pension funds weren't growing enough.
Hard to say.
If it's anything like most countries, because the generation currently drawing a pension never paid in remotely enough in taxes to cover it.
That's what I meant by dipping in: they're using the funds. In the Australian system each person's funds are in their own account and the government can't use it for anything else, nor can the super fund, so it's impossible for someone to be paid out of someone else's account.
This comes up again and again (not just in Slovenia, but in any country that has an inter-generational pension system).
There are two points to make here:
One is that as long as a country produces enough goods and services, money is "just" a tool for allocating these goods and services. How money is being saved and spent has already changed massively; countries have a different tax structure, require people to spend vastly more on health insurance than a century ago, families are smaller compared to a century ago and parents are less dependent on their children in old age (and thus the way our retirement works now is already vastly different from back then). There's little reason to think that the system cannot adapt. This is not to say that it "will" (because, well, predictions are hard, especially about the future), but it would also be unrealistic to assume that what we are going to have 30-50 years from now will be like what we have now. Heck, we don't even know if the "lump of labor fallacy" will still be a fallacy in a future of rising automation or whether part-time work will become the norm. At which point all bets are off, anyway.
As a simple example, we could just implement a basic level of pensions through taxes (in lieu of existing pension schemes) that people could increase through private pension schemes. This is essentially basic income minus the moral hazard (because you don't have to worry about creating a disincentive to work for people outside the labor force).
The second point is that investing privately in your retirement does not fundamentally change anything. When a society ages and has a disproportionate amount of young people, these young people still need to generate enough economic output, regardless of whether the income for those too old to contribute comes out of interest payments, an inter-generational scheme, taxes, or something else.
The idea is ridiculous of course. People are not going to stop existing when you retire, and judging by the last hundred years of progress, they'll be richer and more productive, if less numerous.
I find the mandatory superannuation very refreshing and surprised the US doesn't implement something. I feel if everyone saves 10% of their income for the rest of their working life, it leaves you with something around retirement.
The closest in the US is the company you work for can match upto 4%.
So financial advice in USA is put away maximum into 401k/Superannuation that your company will match because if not, you are losing that free money.
As a current renter, the mandatory superannuation law allows me to make a rational choice to rent when it suits me. Renting allows me the flexibility and freedom to go where the work is. At least have the option to go where the work is. If I owned a home, I wouldn't feel as free.
I plan on buying when it makes sense, but right now, I do not see any benefit of tying up most of my wealth into home ownership.
I look at renting as a utility of life. I need to live somewhere and it costs me x dollars. In retirement, I plan to have x dollars in retirement money to pay for my rent then too.
On the other hand, I'm in IT. I don't ever plan to retire. Because when I retire, I'll be doing the same thing...coding at home. Might as well get paid for it. :)
You can still retire and get a pension,and still make money by coding.
The alternative is pension schemes, alarmingly similar to pyramid schemes. The company (or however it is centralized) pays out of current income, IE current employees or tax payers pay for old pension obligations. This works until it doesn't. If people start living longer, the company/tax base shrinks or no one bothered to do the sums 30 years ago, it collapses.
The reason pension schemes are so common is because it's easier to start a pension scheme and very hard to move from the pension scheme to a superannuation scheme.
When you start a pension shceme, the costs are very low at first while the number of retirees is low. You can pay out pensioners starting now. Superannuation only hits full speed once people have contributed to it for a lifetime start to retire. Way way longer then the horizon of CEOs, politicians or union bosses.
If you try to move from pensions to superannuations, you are in a problem. Your current crop of workers need to pay for their parents/grandparent generation of pensioners while saving for their own retirement as well.
Australia is lucky to have the system it does.
Is there actual regulation that limits how much a company can match? This [1] refers to 6% as a common practice, not a limit imposed on employers.
At two universities where I've worked, the university's contribution to a 403b (401k for non-profits) didn't require any contribution by the employee. At one the university's contribution was 6.25%, at the other it was 5% for employees under 40 and 10% for those 40 and older.
Different companies contribute different amounts, all part of their benefits package. Ex: Company A might pay a high salary but low match. Company B might pay a lower salary but contribute x% to 401k.
http://www.guidestoneretirement.org/ToolsandEducation/safeha...
It was tried over 10 years ago...it bombed politically.
You lose an immeasurable amount of opportunity cost by putting away so much of your earnings there. Not to mention that most of these retirement products are heavily linked to equities, meaning you are very likely to lose a lot if the market down-turns. Short of going on a huge rant on the topic, I'll just settle to saying it's a huge scam that makes people indebted/vested into keeping the market system chugging along, no matter what.
And then we are being told that "rich people" are causing inequality. Right.
I work in the financial sector and reverse mortgages are becoming a big thing: essentially an annuity secured against the house. You get a nice lifestyle and the kids get zip.
Where I live (London), rent is more expensive than mortgage repayments.
The capital repayments are not money lost in the same way that rent would be (assuming your house price doesnt plummet and you are forced to sell at that time).
So in the UK (outside London at least) at the moment there is little argument for renting, assuming you can afford the down payment.
London is a slightly different beast mind as prices have skyrocketed and down payments can be huge
So, if it makes economic sense to rent it, someone is making money on it. After all, the flexibility of renting has to have a price tag too.
In the UK, being a homeowner is usually significantly cheaper month-to-month than renting. And we're still expecting home values to go up forever.
http://monevator.com/historical-uk-house-prices/ especially http://monevator.monevator.netdna-cdn.com/wp-content/uploads...
But I was thinking more in terms of increased mobility -> better bargaining position -> better chance of finding a job that pays $12K more than your current job -> other things being equal, $1K extra disposable income per month.
Someone I know recently told of moving in and out of London over a five-year period. They were very fortunate in being able to buy their house there, because the house price rise was greater than their total salary income over that period. They earned more by being a homeowner (ie leveraged property investor) than by working. And in the UK you don't have to pay capital gains tax on your primary residence.
investment in the short term is still investment.
Neglecting the short term is very risky personal business.
Booze is consumed but it's an important part of many social interactions, without it things can get boring. Boredom closes doors.
A colleague once gave up coffee when he calculated the annual spend as something like a grand. Okay, congrats on the extra grand you'll have in the bank at Christmas. But sucks to be you because you miss out on coffee every single day of the year.
Wise investment advice can hurt your short term life - which does actually run out. You don't stay in your twenties forever. You don't stay in your 30s forever.
We've both agreed that for us renting is the way we are going to go. I hated homeownership.
- Cost of rental more closely tracks income/economic situation, you're also free to go to a place that costs more or less depending on your situation (whereas in homeownership you're locked to a place and the cost is fixed for decades)
- You're less free to go where the jobs are (opportunity cost)
"Oh but you're not building equity" then your problem is in financial education.
The problem is not homeownership per se, it is of locking yourself into a long-term financial commitment for an overpriced asset that you can't afford (even if today you can afford the mortgage payments)
To me, renting means losing money, while buying (or mortgage) seems like an investment. After all, even if potential ROI is not that high for you, think about further generations - your kids will be the owners of your house - and again, they can sell whenever they need.
Sure, but at what cost? Oh and your mortgage was for 300k and you can only sell it for 250k? 200k?
> rent it to others and move to cheaper neighborhood
But is rental covering the cost of your mortgage? Can you rent for that value?
> To me, renting means losing money, while buying (or mortgage) seems like an investment
Of course. That's why a lot of airlines lease their airplanes, banks lease their offices, etc
A lot of people thought their homes were an investment as well, until the bubble burst
Well, this is circumstantial, normally the value of a house climb faster than inflation. Sorry you have that bad experience but it was derived by a distortion in the market, one important component on each investment is timing.
>Of course. That's why a lot of airlines lease their airplanes, banks lease their offices, etc
That is different though. Companies prefer to have variable cost and reduce minimum fixed cost. An airline doesn't know what will be his flight offer in 5 years so renting airplane allows them to be flexible and keeping their cost proportional production. The same for companies offer since you don't know how is going to be the size of the company, although big companies once they are stable tend to own their headquarters.
"Normally" when? In what conditions?
Japan's house prices have been falling for more than 20 years now.
I guess someone should buy the cheap Detroit houses then, they can only go up in price.
> Companies prefer to have variable cost and reduce minimum fixed cost.
I don't disagree with this (though it is increasing their minimum operating cost)
> Japan's house prices have been falling for more than 20 years now.
Japan's economy suffers a deflation since a long time, so not only housing prices are falling.
>(though it is increasing their minimum operating cost)
Actually it is not. Buying an asset have sense only when you know you are going to use it for at least is depreciation lifespan. If you have to sell it before that (because forced laid-off, moving out from city, etc.) you will most likely lose money since probably the interest rates are higher than the valuation rate. This is why most big company owns their headquater (they know/hope to use it for a long time) but rent everything else (They can find a bigger place easily if they need to hire more people, etc.)
It would be more accurate to say "in a healthy, growing economy, the value of a house climbs faster than inflation."
It is not a foregone conclusion that home prices must rise faster than inflation. Like any prospective investor, you must look at the individual factors affecting the property you want to buy before making a decision. Overall, the "home prices rise faster than inflation" trope is incredibly harmful because uninformed investors use it as a heuristic justification for making major life decisions and massive purchases.
Even if home prices did always outpace inflation, it still might not be a good investment. If there are other investment vehicles with a higher yield over the investment period, your money would be better spent there.
I totally agreed, that's what I meant by normally but you are right, it might be not normal at all.
Why? That implies that there's a pricing disbalance at every transaction, starting with the builder who sold it, and continuing with every seller down the road who accepts such a crappy deal. Why do so many rational people and businesses make irrational decisions to sell the house then?
As the house and underlying materials get older, maintenance and replacement costs go up, so eternal appreciation is questionable.
I understand the long-term statistics are on your side, I'm just trying to understand the rationality of microeconomics behind it.
Well a decision like this doesn't have one dimension. For instance, some people in their 60's see that they don't need a big house anymore and could use the extra money on their retirement plans. The tricky thing about houses is that they serve a purposes while can be used as an investment tool.
> As the house and underlying materials get older, maintenance and replacement costs go up, so eternal appreciation is questionable.
True, but in many cases what changes the value is not the house itself but the land where it is located. I agree with other commenter though, this should be a evaluated in a case by case fashion, and my over-simplification was just for discussion's sake.
> I understand the long-term statistics are on your side, I'm just trying to understand the rationality of microeconomics behind it.
And you are right, in the short term it doesn't makes sense because it assumes you'd pay with cash and there are better tool for investment. But if you need a place to live it might make sense to buy a house under certain conditions (you plan to stay in the area for a long time, the economy is not under a bubble, etc.)
Or you buy a house that is well below your means. That's another condition in which buying is a good idea.
The doom and gloom crowd here is an artifact of the boom/bust cycle that's a recent memory, and folks living in areas with insane pricing. If you're paying on equity, even if the house value declines slightly you're recovering some $$$ over time when you move.
The other key thing is that you need to have a traditional mortgage where you are actually paying down principal.
Without the ownership element, your family is subject to the vagaries of the market more directly. What happens when your high school sophomore is yanked out of school because your lease is terminated and you can't afford or get an apartment in your area?
I heard this advice all the time pre-2008. Then those people got burned real bad when things didn't turn out the way they'd hoped.
You cannot always necessarily rent to others. You may have strata / HOA rules that prevent renting.
Buying with cash has an opportunity cost on your money. A mortgage is renting money. Whether you rent a home or you rent money, either way you're paying rent. You also have other "lost money" costs as an owner: maintenance costs (and labour), property taxes, possibly condo fees, etc. So when you consider the "losing money" aspect of owning, you're losing the interest payments, and you're losing some other fees... but the part of your mortgage payment that is excess of interest is not lost money (it's savings).
On other other hand, there are advantages to owning. In particular, if you want to make a highly leveraged wager (5x being common), you can do that in real estate. If you win at the wager, you can win a lot of money. (Of course a casino lets you win a lot of money too, with extreme leverage, but the housing market has no "house" extracting a vig, pun not intended). Also, many countries have tax incentives for ownership. For example, US effective interest rates are somewhat lower than the contractual rate, because the government gives you some of it back at tax time (I think.... I'm not an ardent student of the US housing rules).
In short, a statement like "you've always got options as an owner" or "renting is losing while buying is an investment" is so oversimplified as to be incredibly damaging.
The math is tractable for a modestly smart person, but it does take some dedication.
I walked away, lost my $30K downpayment, 2 years of equity at $2K month in mortgage payments, and have ~3 years of bad credit. With only that negative mark on my credit, I still have a 680 credit score.
I'm never willing to bet again that I'll be in the same location for 15-30 years. I'd rather rent and take what you'd consider "equity" and invest it in something I can get out of in less than 60 seconds (ETFs).
EDIT: Mortgage underwriting guidelines now limit a new mortgage until after 3 years of a foreclosure, not the traditional 7. Why wouldn't someone walk away if it would take more than 3 years to reach neutral equity?
The cost of transaction is higher than it seems if the goal is to minimize the loss.
There's an expected 6% off the selling price, to be divvied up among the agents of your and buyer's choice.
Depending on the nature of mortgage, there might be costs to recuperate, such as points and origination fees.
In some states it's also customary for the seller to purchase a one-year home warranty in buyer's name. Depending on the price and size of the house, this could be another substantial expense.
assets. items of ownership convertible into cash
So buying a house is indeed an asset since you can convert it to cash. Renting is actually pure cost
A home is an asset if it can be sold for money, or used productively. If it turns out that your property is so worthless that no one will buy it at any price, and it's also useless to you as means of production, then it's not an asset. That combination of circumstances pretty much never happens.
The asset value of a home is presumably offset by some debt you owe on it.... and if not, you're paying opportunity cost on the money you paid for the home.
Whether or not real estate is a good investment is much thornier. But real estate is unequivocally an asset.
If you buy a house for a cash, it will take years, until you break-even. And that's fine, businesses depreciate assets like this for decades, too.
If you buy a house with a mortgage, there are costs related to it too. You need to take it into account in your payback period.
However, you will eventually reach break-even point and since that point, you own an fully paid-for asset, that your kids can inherit, for example. With renting, you will pay indefinitely, and own nothing. You are just paying for the service of accommodation.
The sad part is that today, more than ever, where you live shouldn't matter for many office jobs. But it does matter - to employers.
I live in one of those subdivisions that failed to complete before the housing bust. About two years ago an investment group purchased the remaining eleven lots and built homes strictly for the purpose of renting. HOA rules did pay off as they had to keep to architectural rules and even minimum square footage; 2400+
After talking to their builder, turned out it was two investment groups that tend to work together, he was working on three separate subdivisions at one time. All homes are rented by management companies, full background checks, the likes. Being able to rent one, even this far out from Atlanta (think 25 miles) apparently is very desirable and not as simple as showing up with the money. After a few years they either sell out right or do a limited rent to own.
The surprise to me is that there is still substantial turnover in renters. Used to be the rule was stay out of the sub 1k a month rent; the homes near me are 1200-1500 a month; but out of eleven rentals I figure maybe half have had the same families for the first year.
So while I see some subdivision have new building starting and even some that never got the first house down I look close for the signs. Big home builders will be building to sell to homeowners, if the builder doesn't display his name except on permits its likely for rent.
https://en.wikipedia.org/wiki/Misleading_graph#Truncated_gra...
It's one of the clearest and least misleading graphs I can imagine. Starting the Y-axis at 0 would only be less effective at making the point. The Wikipedia section that you link recognises this.
Every graph is misleading if you assume it has properties that are not there.
Remember that, instead of buying, you can rent and invest the difference. If you made a spreadsheet with all fees and costs, you'll come up with 7-10 years as the breakeven point.
But that's no comfort for the generations that miss out.